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Are real estate brokerage fees really worth it? What kind of data exists to help us answer this question with confidence?

Professional experience, backed by market data, suggests that in most cases there is significant value in the brokerage fees paid, and that by trying to avoid these costs, sellers in the Traverse City area pay stiff penalties relative to their property equity, while exposing themselves to potentially severe legal and financial liabilities by trying to “wing it” selling their own home.

Last time we reviewed the first of eight articles/papers that Bobdisqus (a regular commenter on Record-Eagle blogs) offered as support for the fact that the “… usual 6% is an awfully big hurdle to overcome in the higher net equation …”

The first study/paper we analyzed used a very small and specific data set, without accounting for many of the most important variables when drawing their conclusions. Unfortunately, this is a common thread in all eight of these studies, where the conclusions were varied but hold little veracity or applicability to the Traverse City real estate markets.

An often-referenced paper from 2006-2007 gets used for “support” in a number of these studies, but it also suffers considerably upon review; you can read/review the paper HERE.

This study analyzed roughly 800 university-controlled houses, whose ownership was limited to Stanford faculty and some senior staff members, between 1998 and 2004. The Bernheim-Meer study’s abstract reads in full:

Sales commissions for residential real estate brokers historically average nearly six percent of a home’s closing price. Do brokers add sufficient value to justify those commissions? We address this question using a unique data set pertaining to sales of faculty and staff homes on the Stanford University campus. We find no evidence that the use of a broker leads to higher average selling prices, or that it significantly alters [the] average initial asking prices. However, those who use brokers sell their houses more quickly.

There are some key facts to consider before we try to extrapolate the Bernheim-Meer findings beyond Stanford University’s on-campus faculty housing office:

Does the data group reflect either a typical residential housing market, or the real estate market in the Grand Traverse area?

If the data group does not reflect the real estate market in the Grand Traverse area, how much does it differ, and can we still try to draw accurate conclusions from it?

What key factors are missing from the study?

Bernheim and Meer express their gratitude to members of Stanford University’s Faculty & Staff Housing Office on the cover page of their paper.

This “study” reviews a university organized, funded, and staffed housing office whose sole responsibility it is to organize the limited faculty housing, and assist the select number of qualifying university faculty and senior staff in their selection and acquisition of the school-controlled housing. That makes up the entire data set for the Bernheim-Meer paper. Does that sound even remotely comparable to the residential housing markets here in the Traverse City area, or any residential housing market anywhere else in the United States? Ever?

The average sales price of the houses Bernheim and Meer use in their study is $566,666, or roughly four times the average sale price of a house in the Grand Traverse region. Additionally, properties in the half-million dollar price range in our area typically sell with brokerage rates below the 6% used in this paper.

I am tempted to stop right here because this not only fails to be an apples-to-apples comparison, it pushes the envelope of even qualifying as a fruit-to-fruit comparison, and this is one of the key “studies” often cited in other papers trying to assess the effectiveness and value of using a real estate brokerage in marketing and selling your home.

That does not stop Bernheim and Meer, however. They compare their university-controlled housing to other neighborhoods, and try their best to statistically analyze the cost benefits of using a brokerage, but repeatedly admit that their margins of error are “admittedly large,” and that the conclusions they are trying to draw are less and less precise the deeper they explore the questions.

In fact, the Bernheim-Meer paper references the Hendel, Nevo, and Ortalo-Magné paper we debunked in the last blog, which also references the Levitt-Syverson paper which we will review next time (News Flash: It doesn’t hold water either.) Unfortunately for our discussion, each of these fundamentally flawed “studies” reference each other in attempts to draw rational conclusions “supported” by other “academic” analysis.

Note that there are still some faculty sellers in the Bernheim-Meer paper who utilize the professional expertise of a local brokerage, and they are able to sell their staff houses more quickly than if they rely solely on the housing office. Why might that be?

This paper acknowledges that sellers generally benefit from brokers’ services in a variety of ways:

Provide assistance with legal obligations, paperwork and documentation, and successful closing of the sale

Bernheim and Meer suggest that we can judge the value of these services by examining the market prices of each of these component services “unbundled.” In other words, you could always hire all of these same professionals separately:

Attorney

Surveyor

Appraiser

Inspector

Marketing expert(s)

Escrow agent

Title company

Who am I missing?

Unfortunately, Bernheim and Meers’ dollar values are way off (too low), and their list of required professionals is incomplete. Once you add up the independent costs of all of these separate professionals, you will find yourself spending more and receiving less than you would if you hire an expert real estate professional. It is highly likely that you will be better protected, represented, and served by that brokerage than by any conglomeration of other pros you try to combine to replicate the job a good agent will do for you. And it will cost you less to hire the Realtor.

So where does that leave us?

We have to keep looking to find analysis that is both statistically precise, and whose conclusions are rationally drawn. Next time, let’s look at some data that supports the value of utilizing a real estate professional, as well as empirical data that also highlights the advantages of using a brokerage.

What do you think? Let me hear from you. It seems that although people are constantly asking me about real estate and our local markets, the blogs that are most often commented on are the ones that discuss other topics like the Olympics or politics.

From the previous one posted March 23rd you list flaws in approach and data sets and I am certainly ready to grant their imperfections. This is “The dismal science” but we must also recognize that “perfection is the enemy of the good” and attempt to see what we can learn from the data that is available. Not that this would in any way excuse researchers for ignoring data that doesn’t fit their theory. Please do point out any data that counters their observations. Even if it is the dismal one they still strive for science and as such should strive to evaluate and account for all the data not cherry pick.

You point to much lower MLS to FSBO switch rates in the local area as compared to FSBO to MLS from the study area, but again I think the cartel behavior explains this. In this second one you cite the acknowledged faster sale as evidence of better outcome with an agent. In light of the paper you labeled as F in the links you provided ( a classy touch) that concluded agents selling their own homes tend to stay on the market longer than the market average and sell for more for more money I am not at all sure we can count that faster sale as better. You also say in this one that the disaggregated service numbers are to low and the list is incomplete. That would have more credence if you gave us some numbers and told us what they missed.

It is your blog proceed as you wish, but I would love to see you address F as I find it by far the most troubling. The difference in outcomes seems hard to explain. Perhaps they got some strange data from a universe where most of the sellers just wanted a quick sale and didn’t care about the price and so the agents had lived up to their fiduciary duty. Or perhaps agents are by nature outlandishly patient and lucky.